think it is important to realize that although there are 467 sagnosis related groups, only 167 of the diagnosis related groups ccount for 90 percent of the medicare expenditures. And so, that her margin, the other 10 percent has a great number of occasions r review.

One of the most important things we learned in New Jersey was e fact that the total operating expenses in the New Jersey hospils increased less than the national increase. We think that is an portant concern.

Ône of the areas we looked at in terms of the development of the ospective payment system was how to assure predictability for e Government and also for the hospital. And we wanted to estabsh the Federal Government as a prudent buyer of services, rather an to pay, if you will, whatever amount the individual hospitals It was appropriate.

Lastly, we wanted to create a system of rewards and penalties, nd the system would do just that. We have provided an incentive hospital management for flexibility, for innovation, and for more ficient use of hospital resources.

And also, most importantly, we are going to continue to assure e beneficiary will have access to appropriate care.

Let me move now to the impact of the passage of the prospective ayment system.

If you look at this chart, (see chart A, p. 7) you can clearly see at if we had not passed the provisions in H.R. 1900, alternative -B, the Hospital Insurance trust fund would have been going roke in 1986. Passage of H.R. 1900 delayed the termination date of e trust fund to the point where it now is expected that it will be ankrupt in 1989 or 1990. It would be 1989 if there is no payback of e $12 billion that was borrowed from the Social Security Trust und. However, Social Security has indicated to us that they do tend to start paying us back. And if you add that back in, then e will be fiscally balanced until 1990, which gives us a few more ears to work on the problems.

The basic solvency issue, however, is one that we need to contine to work on. We need to continue to think about it in relationip to reimbursement reform, such as the prospective payment stem, as well as looking at alternatives to high cost hospital care. If one looks at the 25-year projection period from 1982 through 007 on the next chart (see chart B, p. 8), the average cost of the ogram, if expressed as a percent of payroll, will be 5.14 percent. uring that same 25-year period, the average current law tax rate running 2.87 percent. So in order to have the program in balnce, we would have to reduce payments by 44 percent, or we ould have to increase the Hospital Insurance payroll tax by 80 ercent, in order to keep the program solvent over the next 25

ears.

Historical Data (1977-1982)
Alternative II-B, Post-TEFRA(1983-1986)
Alternative II-B with provisions of
H.R. 1900 (1983-1989)

50

40

30

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Calendar Year

0

1967 1970

1975

1980

1985

1990

now, the quadrennial Advisory Council on Social Securently analyzing the fiscal problems of the Hospital Inust fund and exploring the long range options for resolunticipate that their recommendations will be in later this will continue, of course, to work towards designing the rogram activities that we believe will make for a more lanced program.

I can, I would like to go over our proposals as we have them to Congress.

d to change behavior. In order to do that, we need to ll kinds of perverse incentives for all sectors of the And we believe that the hospitals, the physicians, the cone employers and the insurers all need to work together hare the responsibility for controlling costs on which I the past we have not always worked together.

rst proposal is to restructure part A of the medicare proprovide catastrophic coverage for the elderly. And in doing are proposing to eliminate the existing limits on the covpital days. Currently we cover 90 days in each spell of ille first 60 days are free and then from day 61 to day 90, the ary pays one-quarter of the cost. And then if he moves into ay lifetime reserve, he pays half of the cost. Each individual e first day deductible which is the average cost of one day hospital, which this year is $304. Next year, as you know, hospital costs are going up, that figure may be $350, bene deductible is determined by statute as the average cost of

's care.

e think in the long run, whatever we can do to bring down enomenal growth in hospital costs, will then bring down the deductible, too.

e proposing to increase cost sharing in the early days of the ciaries spell of illness, because we think that is where the ive could be to have the beneficiary work with the physician. erhaps ask the doctor if it is possible to leave the hospital one rly.

e could save one day of each hospital stay of each one of our are patients, we would save $1 billion a year.

ink many of us are familiar with occasions when that one ould have been saved, although perhaps not in all cases.

are proposing that the cost sharing in the early days in the tal spell of illness be at the rate of 8 percent, or $28 per day, on tal days 2 through 15, and then 5 percent or roughly $17.50 a on the hospital days after the 5th.

e are also, however, proposing to reduce from 12.5 to 5 percent coinsurance on care in skilled nursing facilities that beneficinow pay on days 21 to 100. And also no beneficiary would be ged the coinsurance on more than 60 hospital days a year. The ctible could not be charged more than twice in 1 year's time. nd if I may use an example, under the current law, if an indial was severely ill, and was hospitalized, let's say for 150 days, 1 under the current law the individual could be liable for as ch as $13,475, and after the 150th day then be liable for the full of all uncovered services. By contrast, under our catastrophic proal, the individual would still pay the same first day deductible

10

and would pay an additional coinsurance that would total about $1,530.

Again, we think that this is a better proposal, because it protects the sickest patients and gives the incentive up front to those who perhaps are less ill and could leave the hospital a day sooner.

The second proposal we have is to expand our authority to deal with a voluntary voucher system for our medicare patients to give our beneficiaries the option of enrolling in any one of a number of private health plans.

Last year Congress did permit us to pay HMO's and other competitive medical plans on a risk basis. We would establish a voluntary program of a voucher valued at 95 percent of what we know it would cost to care for that same beneficiary if he had elected traditional coverage.

Each plan would have to guarantee that as a minimum they would pay the same benefits as are currently provided under medicare's parts A and B, and the individual would have an annual opportunity to either change plans or return to the traditional medicare program.

One important feature here is that this would enhance competition among the various private plans, because if the individual beneficiary was able to find a plan that cost less, then the beneficiary could either take advantage of additional services that were offered by that particular private plan, or he could get a cash rebate.

Again, we are trying to effect more competition in the marketplace.

Another proposal we have is to freeze the physician fee. Physician fees are the second largest component of medicare spending. In 1982 it went up an average of 21 percent and in 1983, it is anticipated it will be going up 19 percent. Because the physicians largely have been unaffected by the laws that have been passed under both the Tax Equity and Fiscal Responsibility Act of 1982 and the Omnibus Budget Reconciliation Act of 1981, we believe that it would be appropriate to ask for a freeze in physician reimbursement under the medicare program for 1 year, effective from July 1983 through June 1984, while we study the restructuring of the fee system.

Another component we have is the proposal to increase the part B premium. When the medicare part B program was initially set up, the source of income was to be a 50/50 split, with a 50-percent share from general revenue financing and 50 percent from the premium. Over the years the beneficiaries percentage has eroded because it was tied to social security cash benefit increases. We have found ourselves now with less than a quarter of the total outlays being paid for by the premiums themselves as indicated by the next chart. (See chart C, p. 11.) So we are proposing to increase the premiums.